- Amazon will fan a strong headwind into eBay's earnings.
- Francesca's Holdings' lower margins suggest weak demand.
- American Realty Capital's yield isn't high enough to justify the extreme volatility.
By Robert Weinstein
Many investors get married to their stocks and forget it's about making money, not being right.
If the stock moves higher, it's all good, but when the market doesn't agree with your thesis, the feeling of regret and disappointment can quickly turn into anger. That anger directed at management, the stock market, short sellers and evil financial analysts that fail to fill the punchbowl is wasted. If you take credit for your wins, you must own your losers also.
It's OK and expected to have losing stocks. It's just not OK to keep them one second beyond the point you think they will fall further.
When a stock makes a new 52-week low, it's usually a short candidate. Can they become value buys? Sure, but usually not. So if you're in one of the following companies, take your loss now and spare yourself continued misery and pain. Use the money for another that is expected to perform better and in the long-run, your portfolio will be better off for it.
That's not to say if you don't simply hold tight and wait it out you won't someday find the shares once again above today's price. But why wait it out and possibly see your investment evaporate in half before the turnaround happens? General Electric (NYSE:GE) fell to under $6 before bouncing. Lehman brothers never turned around.
Francesca's Holdings (NASDAQ:FRAN) made a new 52-week low after reporting disappointing earnings. The company missed on earnings by two cents and more importantly, lowered guidance. It's OK to miss on the previous quarter if you have a valid reason such as pushing sales into the next quarter, but never miss and guide lower, or the bottom falls out.
Beyond soft sales, margins declined 340 basis points. In other words, demand is weak, and in order to avoid even worse sales numbers, it had to discount, discount and discount. That's a recipe for a stock that won't bounce back quickly. In fact, shareholders should expect the next few days filled with selling pressure as more white towels are thrown in.
By Friday, you may have a buying opportunity depending on the speed of the washout, but as we move into summer, don't expect the shares to heat up. It's going to take at least one or two quarters of solid earnings and rising guidance before Francesca becomes attractive again.
American Realty Capital Properties (NASDAQ:ARCP) is a high yielding dividend trap. Investors buy this stock thinking they're going to receive fat dividends and beat the market. What they don't understand is "what the big print gives, the small print takes away." It doesn't help your portfolio to earn a yield of 5% if the shares fall 6%.
For American Realty investors it's much worse. The reported yield is about 8%, but the shares lost over 15% in the last year. Because this one is a REIT (real estate investment trust), most of the profits must be distributed as dividends. This means high dividend volatility and subsequently, investors should demand a higher yield in return.
The stock recently traded ex-dividend and the market appears to agree with Zacks downgrade today from Neutral to Underperform. Zacks price target is now $11.70, below the current price. I love dividends as much as the next investor, but wait until it reaches the Zacks target and re-evaluate.
At $11.50, if the per share earnings are holding up (along with dividend distributions), an entry is probably warranted. In the meantime, sell it now before you experience further losses.
eBay (NASDAQ:EBAY) is a far superior investment compared to Amazon (NASDAQ:AMZN) in my opinion. eBay's forward price-to-earnings multiple is value priced and under 15 compared to the nose-bleed 100 plus for Amazon. Margins are higher at eBay, and eBay doesn't have the same vulnerabilities that Amazon has.
Amazon's warehouses have popped up across the country like weeds, and if the consumer slows down spending even slightly, Amazon could sink deep into the red. eBay, on the other hand, is a pure marketplace and users big and small can sell new and used goods without eBay requiring the capital outlays that place the stock at risk.
eBay's recent fall, including Tuesday's further drop into a new 52-week low, isn't the result of Amazon taking sales market share as much as it's about Amazon's tenacity to capture PayPal's payment processing dominance.
Investors should expect Amazon to keep the gloves off and squeeze eBay's PayPal business. In the process, Amazon may not make money, but that's a small consolation prize for eBay's shareholders watching their shares fall.
Sell eBay, but keep it on your radar because in the low 40s (I suggest $42), it's a value buy even while slugging it out with Amazon.